Radically reforming the pensions tax relief system could disincentivise saving, according to a report by the International Longevity Centre - UK (ILC-UK) and Age UK.
The Future of Private Pension Saving report argued that switching to a pension ISA system where tax was paid upfront and income in retirement is received tax-free - known as taxed-exempt-exempt (TEE) system - would be highly damaging to saving.
The report highlighted research showing that under a TEE system, employers would expect their staff to save less and would place a lower value on employer contributions. People would not find the promise of tax exempt withdrawals forty years later to be credible through a TEE system which could kill pension saving.
Instead, the Chancellor should use his 16 March Budget to encourage pension saving by reforming tax relief to make it fairer to lower earners, the report concluded.
Furthermore, the government should promote a savings culture by explaining the roles of both parliament and employers in helping people to save.
- Looking to the long term: A new commission or standing committee dedicated to investigating the pensions system is needed.
- Acknowledging hard truths: People will need to work longer, contribute more of their income and plan for their retirement sooner.
- Honesty and clarity: The Government should communicate changes more effectively and empower people so they may better understand their financial situation.
- Bringing in employers: The Government should appreciate the role of employers more.
- Making taxation clear and fair: The Government should retain the current EET system, and concentrate its efforts on using tax reform to make the system fairer.
International Longevity Centre director David Sinclair said: "The Chancellor must ensure that future generations have access to the best incentives to support saving.
"We need long term savings policy, not one where the goal posts move from Budget to Budget. But developing a long-term savings strategy to avoid future pensioner poverty will go far beyond tax incentives. Government needs to work with employers and savers to create this savings strategy. We must plan now for the long term," he added.
Age UK director Caroline Abrahams said: "We are wholly unconvinced an ISA-style pensions system would benefit this or future generations and extremely worried that it could, in fact, put off lots of people from saving for a pension at all."
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